The New Stimulus Package Might Cause Inflation

Watch the 10-year Treasury yields and crude oil because inflation eats away at retirement income

The U.S. economy can be painful for many, which is evident in the current job market landscape. Over 740,00 Americans filed for unemployment for the first time at the end of February. Despite this, on March 5th, the employment report from February showed that the U.S. economy added 379,000 jobs in the month. This was double that of January’s gain, and it is the best growth since October. February’s employment report showed that over 350,000 of those jobs were added within the leisure & hospitality sector. This might point to a recovery in the segment, which took a hard hit last year.

Without causing controversy and engaging in the debate of whether the job market landscape currently supports the argument for an additional targeted stimulus package, there is another side to this conversation we also need to remember: continued monetary stimulus could lead to inflation. It could possibly lead to hyperinflation, which has to ability to bode poorly for your retirement. As such, there are a couple of data sets that are worth taking a look at when thinking about inflation and the impact it could have on your retirement nest egg: the rise in the 10-year Treasury yield and the price of West Texas Intermediate Crude oil. The first could foreshadow inflation, yet the second might be a contributor.

10-Year Treasury Yields are Climbing

In the past year, the yield has more than doubled on the 10-year U.S. Treasury, and the climb in bond yields absolutely is going to have an impact on the stock market (the extent of the impact is anyone’s guess). When bonds are paying higher yields, in quite simple terms, they can become much more attractive to investors. This causes investors to think about moving out of lower-yielding equities and to the steadier income of bonds. To put it simply, there’s an inverse relationship between bonds and stocks. It is a dance that had been going on forever between the equity and bond markets.

Ponder on one of the ways in which the Treasury yields could directly impact you: mortgage rates. As yields rise, banks come to the realization that they can charge more interest on mortgages of similar duration (this is why rising rates are mostly good for the Financials sector). Even though the correlation isn’t perfect, generally speaking, the 10-year Treasury yield impacts 15-year mortgages. The 30-year yield impacts 30-year mortgages.

As rates continue to rise, housing becomes more expensive and could depress the housing market. This, in turn, affects GDP growth, which could affect the stock markets, which could lead to companies raising their prices, which could lead to higher inflation – so on and so forth.

Climbing Oil Prices

West Texas Intermediate Crude is trading at around $65 per barrel. This price has not been seen in about 2.5 years, but the increase in the past 3 months is dramatic. Inflation and oil are linked due to oil having such a large impact on the economy, and as the price of an oil barrel rises, the cost to fuel our cars and to heat our homes rises as well. Oil is used in the production of plastics, as the price of the input rises so does the final product. This is the very definition of inflation.

Inflation, It Isn’t All Bad, Right?

Economists with a glass-half-full view would correctly suggest higher inflation is a product of a healthier economy with rising demand. A move toward higher longer-term interest rates is a sign that economic confidence is also rising.  At some point, as the economy rebound from the COVID-19 induced bottom runs out of steam, inflation pressures have the possibility to cause the Fed to intervene by raising interest rates.

Think back to when the Fed initiated the first rate hike at the beginning of 2016. There was a 10% correction in the market, and when the stock market was corrected again in 2018 Wall Street thought the Fed had raised rates much too high. By all estimates, we are a long way from the Fed considering rate hikes. Or are we?

Your Retirement & Inflation

Inflation impacts how much your retirement is worth, and over the course of time, it can take a substantial bite out of your nest egg. Understanding how inflation could hurt your retirement strategy is essential for ensuring you have enough funds to last through your retirement years.

Have a talk with your financial advisor to ensure you are accounting for inflation as you create different scenarios and goals for your retirement. Not accounting for inflation is a mistake that you can avoid easily. The financial advisors at NEST Financial can help. Visit our website to contact us to set up an appointment and discuss your retirement goals and how to meet them.

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